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Price-Weighted Average

A method for calculating a stock market index whereby the investment in each component of a given market-representative portfolio is proportional to the component’s price. In other words, an index based on the price-weighted average is equivalent to a portfolio that consists of a number of shares each of which represents one company. The amount invested in each company is proportional to the company’s share price. For example, the Dow-Jones Industrial Average (DJIA) is the simple average of the stocks forming the index. Therefore, adding up the prices of the 30 stocks in the index and dividing by 30 will bring forth the index value at a given point in time.


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